As record numbers of Australians transition into retirement, considering your cost of living and comparing it to your expected average annual retirement income is a crucial step in retirement planning. For many Australians transitioning into retirement, the increasing cost of housing continues to be a burden on people’s ability to pay off their property in their lifetime. This can lead to a few common scenarios — selling the property prior to retirement and renting, continuing to pay down the mortgage and leaving beneficiaries with an asset that has debt owing, or long-term renting due to lack of affordable properties on the market. Naturally, this is a stressful situation for anyone to think about, whether you’re about to retire or you’re a young adult watching your parents prepare for their retirement.
How much money do you need to retire comfortably in Australia?
According to the Association of Superannuation Funds of Australia (ASFA), there are two broad categories of lifestyle in retirement — comfortable or modest. A comfortable retirement affords people with a good car, top-tier private health insurance, dining out on regular occasions, travel, and the other lifestyle factors you enjoyed while working. In a modest retirement, you may be entitled to the Age Pension, but you’ll only be able to afford a basic lifestyle, with limited funds available for small luxuries.
To live a comfortable retirement, you need to have a nest egg of approximately $545,000 for single people, and $640,000 for a couple in super. These nest eggs would generate an income of $43,000 for single people and $61,000 for a couple.
For a modest retirement, you require a much smaller nest egg around $70,000 for single people and couples in super. This modest nest egg is all that’s needed for a modest retirement because the Age Pension and associated pension supplements, if eligible, will may cover most of your living expenses.
How can renting affect your retirement income?
While these numbers help you understand what your nest egg should be before you retire and what you can expect your annual income to be, things become complicated if you don’t own your home. The ASFA’s calculations assume that retirees will own their property before retirement, therefore not needing to allocate money towards mortgage repayments or rent in the household budget. However, the Australian Bureau of Statistics (ABS) report that around 285,000 Australian households are renting in retirement. While renting can afford you the ability to live in a more desirable location than if you owned a property, the cost of your rent still needs to be factored into your retirement planning and therefore the numbers provided by ASFA need to be tweaked if you are renting in retirement.
Can you rent and afford a comfortable retirement?
Based on the ASFA’s calculations, if you live in Sydney retired couples and singles would need $1,166,000 or $1,045,000, respectively to afford a comfortable retirement lifestyle and rent. While this number may be slightly lower for other cities and regional centres where rental prices are lower, it provides a more realistic calculation of exactly how much your retirement nest egg should be if you’ll be renting retirement. Having a greater understanding of how you can structure your super funds in the accumulation and drawdown phases can help you be better prepared.
As with other passive investments, you need to ensure you’re not drawing down so much capital each year that your balance isn’t compounding at an adequate rate to provide you with enough retirement income for the rest of our life. For example, if the average return on your super balance is 9% per year, it is wise to drawdown 4% or less of your balance each year so you can maintain adequate funds throughout retirement, which may be longer than you think. A good financial adviser can work through the calculations based on your individual circumstances, factoring home ownership or rent and any Centrelink benefits you are entitled to, so you can live the retirement lifestyle you want without a fear of running out of money.
What are the alternatives to renting in retirement?
If you don’t own a home and you’re not keen on renting, then there are other options. Maybe you want the freedom of living in a motor home, setting up in a modern tiny home, basing yourself in a retirement village, securing granny flat rights, or, living on a cruise ship. While these options may not be for everyone, the very nature of retirement, can give you the flexibility to live a nomadic lifestyle with a smaller carbon footprint. If you’re interested in staying in one place, a retirement village or granny flat can provide you with that lifestyle.
There’s no one size fits all when it comes to your retirement dreams and your retirement finances. But, if you don’t own your home, you’ll need to factor the cost of rent into your retirement planning to ensure your nest egg and the annual income you’ll draw is enough to provide your desired retirement lifestyle.
Want to know more? Work through your options with one of our financial advisers.